Avoid subscribing to SAIL OFS, says Angel Broking

Angel Broking has come out with its report on Steel Authority of India (SAIL) offer for sale (OFS) issue. According to the research firm, there is still time to play the volume growth story of SAIL. Moreover, it is expensively valued at the offer-for-sale (OFS) floor price of Rs 63 (7.2x FY2015E EV/EBITDA). So one can avoid subscribing to company OFS.

Company background: Incorporated in 1973, SAIL is one of the leading steel-making companies in India with an annual saleable steel production capacity of 12.4mn tonne. Major plants owned by SAIL are located at Bhilai, Bokaro, Durgapur, Rourkela, Burnpur and Salem. The company’s steel plants are fully backed by captive iron ore mines. SAIL has a Navratna status; thus, it enjoys significant operational and financial autonomy. Slow progress on capacity continues: SAIL is increasing its saleable steel production capacity from 12.4mn tonne to 20.2mn tonne by FY2015 at a capex of Rs 72,000cr. We expect robust profitability from these plants, with captive iron ore backing the upcoming steel expansion. Also, we expect SAIL's older loss-making plants to be modernized as part of its modernization program. However, the company has reported delays in its expansion projects over the last few quarters. Going forward, we do not rule out further delays and cost over-runs in its expansion plans. Sales volumes continue to disappoint: SAIL reported disappointing sales volumes for 9MFY2013 in the midst of lower steel demand. Lower-than-expected volumes reflect lower demand in India as well as lack of focus on marketing by SAIL, in our view. Given the slowdown in steel demand in India, and rising imports from FTA countries (which attract lower import duty), we remain skeptical over SAIL’s sales volume growth during FY2014. Outlook and valuation: We expect SAIL’s operational and financial performance to remain weak during FY2014 due to its: 1) inability to maintain/raise sales volumes amidst slower steel demand in India; 2) higher fixed costs, and 3) delays/cost overruns in its brownfield expansion projects. SAIL is on the verge of expanding its saleable steel production capacity from 12.5mn tonne to 24.0mn tonne by FY2015. However, we believe that there is still time to play the volume growth story of SAIL. Moreover, it is expensively valued at the offer-for-sale (OFS) floor price of Rs 63 (7.2x FY2015E EV/EBITDA). Hence, we recommend investors to avoid subscribing to SAIL OFS, says Angel Broking. Also Read: Subscribe to SAIL OFS, says Microsec Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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